Cypress Semiconductor Corp forecast weak second-quarter margins as rising competition hurts prices of touchscreen microcontrollers used in cellphones, sending its shares down 10 percent.
The company, whose touch controllers are used in devices made by South Korea's Samsung Electronics Co, said it expected a gross margin of about 51 percent in the second quarter, down 6 percentage points from a year earlier.
Touchscreen chipmakers such as Cypress, Atmel Corp and Synaptics Inc have been experiencing a fall in prices as new companies enter the market.
Cypress said its margins for the rest of the year would not reach the mid-50s percentage mark.
"The gross margin recovery does not seem likely as robust in the near term as perhaps previously anticipated," said Feltl & Co analyst Jeffrey Schreiner.
Lower margins at its emerging technologies business, whose products include remote temperature control devices, is also expected to hurt overall margins in the second quarter. The business, however, accounts for very little of the company's total revenue.
Cypress said it expected a second-quarter profit of 6 cents to 8 cents per share, excluding items. Analysts on average were expecting 9 cents, according to Thomson Reuters I/B/E/S.
The company forecast revenue to decline 8 percent to 12 percent from the year-earlier period to $178 million-$186 million. Analysts were expecting revenue of $183.1 million.
Cypress shares, which were down slightly in the morning after it reported a better-than-expected first-quarter profit, fell sharply on the forecast. They were down 9 percent at $9.95.
Shares of Fairchild Semiconductor International Inc, another Samsung supplier, which makes power-management chips for PCs and mobile phones, fell 5 percent on the news.
Fairchild's stock had been up modestly earlier in the day after the company reported better-than-expected quarterly revenue.
Fairchild's margins were also pressured during the first quarter as it cut down its inventory and faced higher product testing costs. It expects adjusted gross margin in the second quarter to rise as utilization of factory resources improve.
Cypress's book-to-bill ratio rose to 1.04 in the first quarter, suggesting increased demand for its chips. A book-to-bill ratio above 1 means a company has more orders in a quarter than it can deliver.
Revenue fell 7 percent to $172.7 million in the first quarter, the smallest percentage fall in four quarters, beating the $167.5 million analysts were expecting.
The company, which also makes specialized chips for computers, has been hit by dwindling personal computer sales over the last few quarters.
PC sales plunged 14 percent in the first three months of 2013, the biggest decline in two decades of keeping records, while tablets continued to gain in popularity, tech tracking firm IDC said last week.
Cypress's net loss widened to $28.2 million, or 19 cents per share, from $19.5 million, or 13 cents per share, a year earlier. Excluding one-time items, it earned 3 cents per share, above analysts' estimate of 1 cent per share.
(Editing by Sreejiraj Eluvangal and Saumyadeb Chakrabarty)